Intel for Mellanox?

There is some news out of Intel yesterday, and an even more interesting rumor.

The news is that they have chosen a new CEO. We do not know Mr. Swan, and have no strong opinion on his prospects. The Street does not seem to like him, with Intel’s stock off a few percent on the news. The Street does not like the fact that he has no technical background, and it always raises a few eyebrows when a company conducts a high-profile search only to end up back where they began, with the interim CEO.

More interesting was the rumor that Intel had put in a $6.6 billion bid for networking chip maker Mellanox. First a word of warning, Mellanox is perennially rumored to be on the verge of getting acquired by someone. A month ago it was Microsoft. This time it is Intel, or allegedly Intel and Xilinx in a bidding war. So what is going on?

Mellanox makes chips and hardware for networking. They are a small company in a large ocean and have and have built a pretty good track record around having high-end products. A small but profitable segment (i.e. bigger than a niche).

But the whole semis industry is consolidating, and many people view Mellanox as being sub-scale for long-term independence. A couple years ago, activist investor Starboard forced their way on the board, and have likely been beating a constant drum-beat of “Sell the company”.

As we noted, there have been plenty of past rumors about a sale, but there are enough details in the latest rumors to make us think there may be some substance this time around. Reading between the lines, it looks like a formal auction process started a few months back, and someone leaked that Microsoft was taking a look. Our guess is the latest rumor was sparked by Mellanox’s bankers leaking the fact that Intel is winning the auction to see if anyone higher bids shake out. In fact, writing that last sentence we realized we have a pretty good guess as to who Mellanox is using as their banker.

Depending on where the final price ends up, this could be a good business for Intel. Mellanox is nicely profitable and has some great technology. It would fold in neatly to Intel’s data center group which has some overlapping but generally less successful products.

That being said, nothing has actually been announced yet. Intel’s lawyers could still find a ten-year old contract with one ambiguous clause that could prevent this deal at the 11th Hour. If the deal does happen, we will revisit with what this means for the broader industry.